Credit/Debt Recovery

Cost of Raising a Child

Here's a quick stat for you parents out there who are trying to create a budget.

According to the U.S. Department of Agriculture, it cost $178,590 to raise a child in 2003. That's for middle-income families. Annually, that works out to $10,760, or $897 per month.

You're not an adult until you're 21

NY Senator Chuck Schumer is proposing new laws that will make it more difficult to grant credit to college students.

In a speech at NYU, Schumer blamed credit card companies for college students' credit card debt, and is proposing a bill that would require creditors to get parental consent before granting credit to dependent students under 21.

This may sound reasonable to most readers, though I suggest we raise the voting age and the cumpulsory draft age to 21, since 20 year olds are still children, apparently.

Schumer's the one responsible for killing bankruptcy reform the last time it was proposed. That BK reform bill would have done nothing but help consumers and creditors alike, but Schumer put in the poison pill anyway.

This goes back to what I've been saying about being more anti-creditor than pro-consumer. Schumer attacks the credit card companies before introducing this new bill. He doesn't do anything to create a win-win situation that will benefit all parties. He wants the debtor to win, and the creditor to lose.

Well, it ain't gonna happen. Creditors may be evil, greedy, selfish, and all the rest, but you're not going to beat them at this game. We've got to work together to foster a culture of cooperation between creditor, consumer, and legislator. Credit counselors have been doing that for decades, but they've been set back recently by profiteers within their ranks and legislators who believe the lies tying credit counselors more closely with creditors than is actually the case.

And I know it's possible for creditors to genuinely care about their customers, and not just act out of greed and pure evil. I've worked with mortgage lenders who care, and every credit union I've dealt with put their members' first. Gradually, more of the lending industry can become more like that--but not if U.S. Senators keep attacking them and blaming them for everyone's debt problems.

More on homeownership

Some of the debate surrounding debt and credit centers on responsibility. Thinking people agree that the debtor bears most of the responsibility for the debt they incur. The serious debate centers on how much responsibility the creditor should be assigned.

I'm on record saying the creditors should do more to help indebted Americans. That's true. But they should really help consumers before they get into debt.

My house payment is just under 50% of my gross pay.

Anybody would tell you that's too much. Hell, I wrote a book stressing that very fact, and here I sit with a house payment that's too high.

Of course, I have no other debt. Not even a car payment. No student loans, no credit cards, nothing. (That's why I had no credit score, as long-time readers will remember.) So I can handle this house payment for now, but I wouldn't advise anyone else get a loan like mine.

Should my mortgage lender have even given me this loan? Ultimately, they'll never have to foreclose on me (knock on wood), but how can they know that?

I've been saving to buy a home for years. I have a lot in my savings account. In a year I'll refinance to a fixed rate, pay down my balance, and lower my house payment. So that big house payment will be temporary. But if I were someone with lots of personal debt, I doubt I'd have gotten the loan, and if I had, it would have been irresponsible of the lender.

A reader hit me with this:

we're going to see that every American that wants one gets a home with a big mortgage.... even if we have to foreclose on 25% of them to make it happen.

A friend of mine who works in collections is continually frustrated with his bosses' attitude; "20% of the loans are going to go bad. That's just how it is. We just have to count on the other 80%."

Is 20 or 25% acceptable losses? What other industry would tolerate that? Should creditors screen more carefully before granting loans? You hear a lot about credit scores, and not all of it good, but sometimes I think they don't go far enough in screening out applicants who can't handle a debt.

Rethinking Homebuying

I'm feeling guilty the last couple of weeks.

Over the past few years, I've told thousands of consumers to waste no time in becoming homeowners. "Buy a house!" I've said. "It's the best first step toward wealth creation!"

Well, I've bought a house. And the whole experience has been draining and stressful--I had ZERO comprehension of the ancillary costs associated with home ownership. Ceiling fans and light fixtures alone drained my vacation savings fund. And I'm not even close to finished.

I've sort of felt like apologizing to all of those consumers I urged into home buying. Of course, I know that in a few weeks I'll be settled in and all will be well, and it is for the best, but right now I can't help but think I bit off more than I can chew (and I've taught First-Time Homebuyer Workshops).

A very insightful reader sent me an email:

The logic goes: Homeowners make good citizens. Bull! That's like saying that standing in a garage makes you a car. Good citizens make good homeowners! You can take that one to the bank.

I think I had fallen into that logical fallacy. I've been urging people to buy houses, when it's really more important to have one's finances in order before shopping for a home.

I'm still a believer in homeownership, but I urge careful self-reflection before taking that step. It's a BIG responsibility.

Credit Unions Vs. Banks

There's a great article in this week's U.S. News and World Report about credit unions drawing fire from banks.

I heard some rumbling about this a couple of years ago at a credit union conference; they were concerned about the banks' impending efforts to strip Credit Unions of their non-profit status. Now, it seems, the banks are ready to strike.

If you've read my book, you know I'm pro-credit union. If you haven't read my book, do so! It's only ten bucks.

Ahem. The banks are wrong on this one, plain and simple. They're greedy, they're losing the battle for customers, and they're getting what they deserve. Now they want to cry foul and punish credit unions for serving the community better than they do.

That's just my take; I have a lot of reasons for believing credit unions are superior to banks, but let me provide just one. When I was trying to bring the Get Checking program to the Inland Empire, I had a lot of trouble getting banks to sign up, but credit unions were much more receptive. On balance, I just believe that CU's are truly more committed to their members than banks are.

Oliphant Column on Credit Card Issuers and the GOP

If you've ever read any Thomas Oliphant columns in the Boston Globe, you know he's a committed lefty. If you've read any of his columns lately, you know he's a lefty who should be committed. (Honestly, I have no strong anti-Oliphant feelings; I just went for a cheap joke. Though his suggestion that Kitty Kelley's new book about the Bushes should be taken seriously is enough to prove he has no objectivity whatsoever.)

His August 29th column points out that the banking, insurance, and real estate sectors have contributed $25 million to Bush's campaign this year.

He targets MBNA as a "Monster," and you know I've had some issues with MBNA myself lately. He also makes this valid point:

The latest goodie was a ruling from Bush's Treasury Department preempting all state laws, notably in California, that have sought to put a brake on some of the most abusive credit card practices -- a remarkable flip-flop for a conservative government supposedly respectful of states' rights.

Oliphant is right about this. No argument here.

He then disparages bankruptcy reform:

The campaign cash is also gushing because the personal finance people know Bush will back another attempt in Congress to make it harder for Americans to escape, via bankruptcy, the debtor prisons constructed for them.

Okay. Regular readers know I'm way in favor of the proposed bankruptcy reform. Let me say this one more time:

THE PROPOSED BANKRUPTCY REFORM WILL NOT MAKE IT HARDER FOR CONSUMERS WHO NEED BANKRUPTCY PROTECTION TO GET IT.

The argument that BK reform will limit access to bankruptcy is a huge red herring. It will make the process of filing bankruptcy more involved, and in a good way. But people who need bankruptcy will get it. Period.

And no, I'm not going to back that up with facts, logic, or reasoning. I'm just going to blythely assert it, just like Oliphant blythely asserts that BK reform will "make it harder for Americans to escape, via bankruptcy, the debtor prisons constructed for them."

And please... "debtor prisons costructed for them?" Credit used be a luxury in this country. If you can't make the payments, don't borrow the money. Of course the creditors need to be more careful to whom they lend, but they can't bear the full responsibility for their customers' debt woes.

Personal responsibility:

Every right implies a responsibility; every opportunity, and obligation; every possession, a duty.

John Dr. Rockefeller, Jr.

Ahem.

Okay, then Oliphant gets back on track with universal default. John Kerry promises to end that hideous practice, and more power to him if he wins. Again, no argument with Oliphant there. And he wraps up by taking a deserved dig at sub-prime lending, which is a subject for another 2,500-word rant.

On balance, it seems I agree with Oliphant here as often as I disagree with him. He's wrong if he thinks he can blame lenders for every debt problem in the U.S., but personal responsibility is a two-way street: creditors do need to do a lot more to help indebted Americans, there's no question.

And hey Americans, stop taking on so much debt! Toughen up. Read my book.

(Oh, I suppose, on the political side, I should say that I'm still on the fence in this election year. I don't love Bush, but I certainly don't think anybody should take Kitty Kelley seriously. As for Bush being in the pocket of the personal finance industry, well, so what? Every politician has been bought by some scary group of special interests. I'm way more worried about Bush's potential Supreme Court appointees than who's contributing to his campaign.)

TXU shelves credit-related fee plan

Last week, TXU, a utility company in Dallas, made waves when it announced a plan to base utility rates on the customer's credit score.

It's actually a bit more complicated than that, but the essence of the story is, if your credit history is poor, you'll pay higher rates. Read the USA Today article for more details.

Now, a week later, TXU is delaying that plan. They are going to "duscuss the issue with state regulators."

This idea isn't dead yet, though. Eventually, this notion will catch on and spread, and your credit score will affect your utility rates and other regular service fees. So now more than ever it's imperative that you check your credit reports regularly, get a credit correction done if necessary, and be very careful in your credit use.

And buy my book! ^_^

Bad News for Ameridebt

Newsflash: Ameridebt isn't really non-profit.

Okay, that's not exactly news. If you didn't know that already, this must be your first time here. Welcome.

According to this article on accountingweb.com, the IRS has filed a $15 million dollar claim against Ameridebt in anticipation of stripping away the profiteering credit counseling firm's 501(c)3 non-profit status.

I've been praising this IRS investigation since it started last year. It's about time they weeded out the bad players and gave the honest credit counseling services a chance to flourish again. There are a lot of problems facing reputable credit counselors these days (diminishing or disappearing fair share, legislative intrustion, attacks from "consumer advocates") but the prevalence of dishonest players like Ameridebt (and many others) is the single biggest problem for the industry right now. They are so visible and so large that a lot of consumers don't even know there's such a thing as "reputable credit counselors."

Well, there are, and they won't have any problems defending their non-profit status. Of course, some prominent consumer advocacy groups are out to get the industry, and they'll be pushing for all credit-counseling services to lose their tax exempt status (under the deluded belief that credit counseling is a wing of the creditor's collections industry). I don't think this will happen, but time will tell.

Another heinous Predatory Servicing practice

Over the past couple of years, I've seen more and more examples of creditors falsly reporting to the credit bureaus in order to negatively affect a client's credit score.

What I'm seeing more of is a creditor reporting the client's credit limit as being the same as their balance. Suppose your credit limit is $1200, and you owe $452. Some creditors will report your credit limit as $452 instead of $1200. Now it looks like you're using every dime of credit you have, and that seriously diminishes your credit score. If they reported accurately that you have a higher credit limit, it would actually improve your credit score.

This is predatory. And it's particularly evil because it's such a sneaky way to hurt someone. Is it illegal? It should be, but I don't think we're going to see the FTC cracking down on the creditors who do this. Unless we raise our voices, that is.

Which creditors do this? I know of a couple off hand; one's a friendly neighborhood retail store that's probably just moved to your area whether you like it or not, and the other wants to know what's in your wallet so they know how much they can take. No hassle my a$$.

Predatory Servicing

I've resisted the urge to label creditors as evil. They do evil things, certainly (universal default, for example), but in my business I believe we need to work together to help consumers and in so doing forge a healthy economy.

That's why I must break ranks with "consumer advocacy groups" who are way more anti-creditor than they are pro-consumer.

But the creditors continue to do short-sighted, stupid things that are bad for the consumer, bad for credit counseling, and in the long run, bad for the creditor.

I'm talking about Predatory Servicing. A lot of creditors (mostly sub-prime lenders) have gotten into trouble for Predatory Lending over the last few years. They pick a low-income area where consumers don't have much choice in lenders, and take advantage of them with high-interest, fee-laden loans. And, of course, they preyed on minorities; lenders regularly inflate interest on loans to minorities above what their credit score suggests.

Now that Predatory Lending has gotten lenders sued, dragged before congress, legislated at, and vilified by the media and writers like me, we're seeing the rise of Predatory Servicing.

Creditors are showing utter contempt for their customers, refusing to offer viable workouts, taking away concessions, and basically making it more and more difficult for a consumer to pull him/herself out of a tough situation with the help of a credit counselor.

Here's an example. A major creditor, (Maybe I'll Name them Another time, but believe me, they're a Major Bank in North America) is in the practice of sending their clients who are in trouble to a DMP-mill for servicing. When they have a client in trouble, they don't refer them to the NFCC, or give them a list of options, they send them straight to a bunch of profiteering crooks who are as bad as Ameridebt ever was (how bad? I expect a perp walk any day.)

Why do they do this? Why send your valued customer to hacks who provide shoddy service and don't have any educational programs or HUD-certified housing counseling? Stupidity. In the short term, it's better for this creditor. The DMP mill I'm talking about doesn't get any Fair Share. So these clients get what passes for credit counseling services, and the creditor doesn't have to contribute.

What kind of service do you think the DMP mill provides when they're not getting Fair Share? We know they're not providing housing counseling, tax preparation, education, or any of the helpful services a reputable counselor offers, and at 0 Fair Share, they're not going to bend over backward to help the client with what few services they do offer.

The whole arrangement is junk. It's bad for the client, bad for the agency, and serves only the short-term interests of the creditor.

You've heard of the Fair Debt Collection Practices Act? It's incredibly onerous, and in truth, wildly unfair. It hamstrings Debt Collectors in their work and goes way overboard in protecting the debtor from even the mildest inconvenience when dealing with debt collectors.

Thing is, I have no sympathy for debt collectors. They brought it on themselves. If they hadn't been so abusive, so evil, and so willing to cross the line into harrassment, there'd have been no need for the FDCPA. They got what they deserved.

Now, the creditors are setting themselves up for the same kind of fall. By being stupid, short-sighted, and greedy, they're creating a class of dissatisfied and underserved consumer, attracting the ire of media types and writers like me, and setting themselves up for a congressional smack-down that will have them legally bound to pay Fair Share and offer favorable workouts if they're not careful.

Just like with Predatory Lending, Predatory Servicing will catch the nation's attention, consumer groups will howl, and junior congressment will take the opportunity to pass a law so it will look like they've earned their pay. Creditors must change course now, before that happens. Take away the consumer group's and the government's excuse to brain them with the crowbar of socialism. Lots of creditors are smart; someone with an MBA should examine this, and they'll see that in the long run, Predatory Servicing will cost them a lot more than it will save them in the short term.

We'll delve into other examples of Predatory Servicing anon.